Just a few days ago, the Bank of England rejected the opportunity to increase the base rate for the second consecutive month. It was a unanimous decision – perhaps unsurprising, given that it had finally taken the plunge in August and lifted the base rate beyond 0.5 per cent for the first time since March 2009.
This decision comes just after the ten-year anniversary of the collapse of Lehman Brothers and the beginning of a huge global financial crisis.
The Bank’s 0.25 per cent increase to the base rate, pushing it up to 0.75 per cent, was the second increase in 12 months. And naturally, people want to know what it means for their savings, investments and household finances. The quick answer should be “good news for savers, bad news for borrowers”.
A higher base rate makes it more expensive for banks to borrow money. Generally, lenders increase the cost of borrowing for customers, and raise interest rates on savings to encourage deposits.
But Which?’s latest research suggests that’s only partially true. We tracked all announced changes to instant-access savings accounts and cash Isas, and changes to standard variable rates (SVR) applied to mortgages, between 2 August 2018 and 3 September 2018.
In the month following August’s base rate rise, we found that just one in six instant-access savings accounts have risen by the full 0.25 per cent increase – while half of mortgage SVRs were hiked by the full amount.
What’s more, of the providers offering both savings products and mortgages, one in five had raised the cost of variable-rate mortgages by the start of September while leaving savings rates unchanged.
Our research found that, in total, 66 per cent of the instant-access accounts available to savers did not pass on the base rate increase. Some 18 per cent passed on less than the 0.25 per cent increase, and 16 per cent passed on the full amount. The trend was the same in the cash Isa market, where there was no increase in rates for 68 per cent of instant-access accounts, 17 per cent got less than the increase in the base rate, and 14 per cent enjoyed the full base rate rise.
Depressingly, lenders were eager to push up mortgage rates.
Of 87 mortgage lenders we analysed, 44 upped their SVR after the base rate increase, and all but two of these opted to pass on the full 0.25 per cent.
We found eight providers that failed to increase their instant-access savings rates before 3 September, but did implement a 0.25 per cent increase to mortgage rates. This means that customers on SVR mortgages faced higher costs, while savers saw no increase to their returns.
Some providers implemented increases to the mortgage SVR within a week of the base rate decision, but didn’t plan to increase variable savings rates until mid-September, or even October – meaning customers paid more for their mortgages for more than a month before benefitting from increased interest.
Another 12 providers raised their savings rates, but by less than 0.25 per cent, even though their mortgage rates increased by the full amount.
The same pattern of unfair practice played out after the last base rate increase in November 2017, Which? analysis found.
If you have your savings with a high-street bank, things are even worse. According to data company Moneyfacts, not a single high-street bank pays an interest rate on their easy access accounts equivalent to the 0.75 per cent base rate. The highest rate on offer is a measly 0.55 per cent. And just three increased their rates by 0.25 per cent following the increase to the base rate.
Why do banks and building societies continue to pull these cynical tricks on their customers? When the opportunity to extract a smidge more interest out of them arises, they are lightning-quick to move. Desperate savers are looking at this rate rise as the line in the sand after nine years of miserable returns and the vast majority have been penalised, not rewarded.
We’re now a decade on from the banking crisis, where the reputation of the banking industry was at its lowest. Much has been done to improve things, but this behaviour shows the kind of hypocrisy that has soured this market in the eyes of consumers.
There will be more rate rises coming in the future, as the Bank of England has been keen to warn. But looking at the way banks and building societies have reacted with their lacklustre response to previous rises, don’t hold your breath for fair treatment.
My advice is to ditch your bank if it’s paying you a naff rate and has screwed you over on the base rate rise. It’s a shame I have to say it at all.
Gareth Shaw is head of Which? Money Online